Bernanke: Joblessness to stay high

Fed chief says it could take four or five years for unemployment to fall to "normal" rates.

by Joshua Zumbrun, Bloomberg News, Posted: December 6, 2010

WASHINGTON - Federal Reserve Chairman Ben S. Bernanke said that unemployment might take five years to fall to a normal level and that Fed purchases of Treasury securities beyond the $600 billion announced last month in a controversial move were possible.

"At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate" of about 5 percent to 6 percent, Bernanke said, according to the transcript of an interview to air Sunday evening on CBS's 60 Minutes.

Purchase of more bonds than planned is "certainly possible," said Bernanke, 56. "It depends on the efficacy of the program" and the outlook for inflation and the economy.

Bernanke has defended the central bank's decision to purchase $75 billion in Treasury securities a month through June as necessary to prop up a weak recovery.

Only 39,000 jobs were created in November, and the unemployment rate rose to 9.8 percent, the highest since April, the Labor Department said Dec. 3, three days after the Bernanke interview was recorded.

The economy, which grew 2.5 percent in the third quarter, is so weak that Bernanke said growth could fizzle out without support. "It takes about 2.5 percent growth just to keep unemployment stable, and that's about what we're getting," he said. "We're not very far from the level where the economy is not self-sustaining."

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Bernanke said a return to a recession "doesn't seem likely" because sectors such as housing cannot become much more depressed. Still, a long period of high unemployment could damage confidence and trigger another slowdown.

The Fed's decision to undertake the bond purchases sparked a political backlash and fears of renewed inflation in Washington.

Sarah Palin, the 2008 Republican vice presidential candidate, wrote in a Nov. 18 letter to the Wall Street Journal that "it's time for us to 'refudiate' the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems."

Inflation has slowed this year, with the personal-consumption expenditures index, excluding food and energy, rising at a 0.9 percent annual pace in October, the slowest in 50 years. Including all items, the index increased 1.3 percent.

Without action by the central bank, the economy might have tipped into a period of deflation, or a prolonged drop in prices, Bernanke said.

"Because the Fed is acting, I would say the risk is pretty low" of deflation, Bernanke said. "But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern."

The Fed's policy of purchasing Treasury securities should not be considered simply printing money, Bernanke said.

"The amount of currency in circulation is not changing," he said. "What we're doing is lowering interest rates by buying Treasury securities."